CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Saturday, December 31, 2011

Residential Natural Gas Prices Are Dropping in PA and OH, Thanks to the Marcellus Shale Boom

1. "An increased supply of natural gas -- thanks in part to development in the Marcellus Shale -- as well as warmer weather patterns have lead to lower gas prices for Western Pennsylvania customers in the first quarter of 2012. All three utility providers in the region announced lower rates Friday for the quarter starting Jan. 1 and extending through March 31.

2. "Columbia Gas of Ohio customers have something to look forward to in January: bills that are lower than they were a year ago. The company this week said consumers who buy natural gas through its standard service program will pay 19 percent less than in January 2011. Record levels of natural-gas production in the U.S. are a major factor in the price drop.

“Our price for natural gas today is nearly as low as it was 10 years ago. How many other companies can say that about their product?” Jack Partridge, president of Columbus-based Columbia Gas of Ohio, said in a statement."

Wall Street Journal -- "U.S. natural gas prices fell to their lowest point in more than two years, underscoring how the nation's booming energy business is becoming a victim of its own success. Mild weather and oversupply have pushed the fuel's price below $3 (see chart above).

Prices for the commodity have been under pressure over the last couple of years, as new drilling techniques unlocked vast new stores of natural gas from shale formations and other so-called unconventional reservoirs. But in the last two months, the steady price decline has turned into a free-fall, as unusually mild temperatures across much of the U.S. have damped demand for gas to heat homes and offices.

Natural gas for February delivery settled Friday at $2.989 per million British thermal units, the lowest closing price for the commodity since September 2009 (see chart). It closed below $3 in the winter for the first time in nearly a decade.

"The sub-$3 levels for gas prices in the winter really point to the incredible amount of nonconventional gas that has come onto the market the last two years," said Gene McGillian, analyst at Tradition Energy in Stamford, Conn. "Our production levels, our mild winter and the gas we have in storage have combined to crush natural gas prices this month."

Natural gas traded as high as $13 per million British thermal units in July 2008. But in recent years, domestic production boomed, with horizontal drilling techniques and hydraulic fracturing, or "fracking," helping producers unleash a flood of gas from shale formations in Pennsylvania, Arkansas and elsewhere.

Natural gas production in the lower 48 states hit a record 71.3 billion cubic feet a day in October (see CD post). The bonanza has ushered in lower prices for many consumers and businesses. New Jersey's Public Service Electric and Gas Co., citing lower costs partly due to shale drilling, reduced residential gas rates on Dec. 1 by 4.6%, bringing to 35% the utility's total decrease since January 2009.

Shale drilling has also created jobs and the prospect of greater energy independence, while raising environmental concerns. But the fresh abundance of natural gas has also weighed on its price, undercutting the profitability of the business for energy companies.

Still, due in part to the structure of the business, the torrid pace of natural gas production shows few signs of slowing. Producers often have a limited time to begin drilling once they lease property, which leads many to drill wells regardless of commodity prices or risk losing their hold on reserves. Other companies are forced to drill by the terms of joint ventures they signed when the outlook on gas prices was rosier."

MP: Overall, the fact that the shale gas industry is "becoming a victim of its own success" is only a temporary "problem," and demonstrates that the price system and competitive market forces are working as expected: an abundant supply of natural gas leads to falling prices, which lowers the profits of producers, which then leads to automatic, self-correcting adjustments and responses as the natural gas market moves towards a new equilibrium.

All of those automatic adjustments (increased demand and decreased supply) will raise the price of natural gas over time, eliminate any economic losses currently being incurred by producers because of the low prices (and drive economic profits to zero in the long run), and the market will move towards a natural market-clearing equilibrium that eliminates the current "oversupply."

Friday, December 30, 2011

The New Age of America's Energy Abundance: The No. 1 U.S. Export This Year Will Be Petroleum

Top 15 U.S. Exports, January-November 2011

Rank

Export Category

Jan.-Nov. 2011 (millions)

1

Petroleum products

$87,543

2

Pharmaceutical preparations

$37,547

3

Industrial machines, other

$37,456

4

Semiconductors

$36,898

5

Chemicals-organic

$32,514

6

Plastic materials

$30,219

7

Telecommunications equipment

$29,885

8

Electric apparatus

$29,147

9

Nonmonetary gold

$27,821

10

Civilian aircraft

$27,179

11

Medicinal equipment

$26,591

12

Computer accessories

$26,520

13

Chemicals-other

$24,150

14

Industrial engines

$23,246

15

Engines-civilian aircraft

$21,648

Source: BEA

NEW YORK (AP) -- "For the first time, the top export of the United States, the world's biggest gas guzzler, is — wait for it — fuel.

Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990 (see table above of the top 15 categories for U.S. exports through November of this year). It will also be the first year in more than 60 that America has been a net exporter of these fuels. The last time the U.S. was a net exporter of fuels was 1949, when Harry Truman was president.

Just how big of a shift is this? A decade ago, fuel wasn't even among the top 25 exports. And for the last five years, America's top export was aircraft.

The trend is significant because for decades the U.S. has relied on huge imports of fuel from Europe in order to meet demand. It only reinforced the image of America as an energy hog. And up until a few years ago, whenever gasoline prices climbed, there were complaints in Congress that U.S. refiners were not growing quickly enough to satisfy domestic demand; that controversy would appear to be over.

Fuel exports, worth an estimated $88 billion in 2011, have surged for two reasons:

1. Crude oil, the raw material from which gasoline and other refined products are made, is a lot more expensive. Oil prices averaged $95 a barrel in 2011, while gasoline averaged $3.52 a gallon — a record. A decade ago oil averaged $26 a barrel, while gasoline averaged $1.44 a gallon.

2. The volume of fuel exports is rising. The U.S. is using less fuel because of a weak economy and more efficient cars and trucks. That allows refiners to sell more fuel to rapidly growing economies in Latin America, for example. In 2011, U.S. refiners exported 117 million gallons per day of gasoline, diesel, jet fuel and other petroleum products, up from 40 million gallons per day a decade earlier."

HT: Bill Greenway

Update: The chart below shows that net oil imports this year of 45.4% of U.S. consumption will be the lowest since 1995. So while the U.S. becomes a net exporter of fuel for the first time since 1949, net oil imports are falling to a 16-year low.

Krugman: There's No Grand Government Conspiracy to Hide Inflation and MIT's BPP Data Confirm That

From a December 18 blog post by Paul Krugman, who I happen to agree with on this issue:

"One response of inflation-fearers to the absence of the inflationary
outburst they’ve been waiting for is to reject the numbers, and claim
that the BLS is hiding a much higher rate of inflation than the official
numbers say. You see that a fair bit in comments, and some credulous
mainstream figures (i.e. Niall Ferguson) have also bought into this
story. How do we know that it’s wrong?

We now have price measures calculated independently by people not in the government — in particular, the MIT Billion Prices Project.
The BPP collects prices from the internet; this means that it’s not a
perfect match for the consumer price index, which includes things such
as services that are generally not sold online. But if inflation were
much higher (or much lower) than reported, you’d expect to see a big
divergence between the independent index and the official stats. But you don’t (see chart above).

Forty months into the project, the BPP shows a price rise about a
third of a percentage point higher than the CPI. That’s around 0.1% higher inflation annually -- i.e., essentially nothing. Sorry, folks, but there’s no grand conspiracy to hide inflation."

MP: A well-known government inflation skeptic is John Williams (Shadow Government Statistics), who claims that the current 3.4% "official" annual inflation rate through November (NSA) as calculated by staff economists at the BLS is being manipulated to show a downward bias, when his "unbiased and un-manipulated" inflation is closer to double that rate, or about 7% (calculated using the methodologies in place in 1980).

But Krugman makes a good point - why doesn't the alleged downward government bias show up in a huge difference between BLS and BPP inflation rates, with BBP inflation being much higher? The current BLS-reported annual inflation rate of 3.4% is actually slightly higher than the 3.25% BPP annual inflation rate through November, so if anything, the government measure of inflation might be showing a slight upward bias.

Q: If there is a government conspiracy to hide inflation, why is the government's CPI measure of prices so close to the price index compiled from the internet by MIT?

BPP@MIT Data Show Inflation Trending Downward

The charts above shows monthly and annual inflation rates from the Billion Prices Project @ MIT over the 12 month period ending at the end of November. According to the BPP website, the index is "designed
to provide real-time information on major inflation trends, not to
forecast official inflation announcements. We are constantly adding new
categories of goods, but we do not cover 100% of CPI goods and
services. The price of services, in particular, are not easy to find
online and therefore are not included in our statistics."

Bottom Line:
Monthly inflation, measured by the BPP @ MIT, has been trending
downward since February, and at the end of November was showing slight deflationary pressures. Similarly, BBP annual inflation has been trending downward since last summer and reached an eight-month low at the end of November. According to this real-time measure of inflationary trends in the U.S. economy, inflationary pressures are gradually moderating, and there is even evidence now of short-term deflation for the month of November.

Restaurant Indexes Improve in November With Strongest Net Positive Sales Since August 2007

"Driven by positive same-store sales and an increasingly optimistic outlook among restaurant operators, the National Restaurant Association’s Restaurant Performance Index (RPI) rose to its highest level in five months. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.6 in November, up 0.6 percent from October (see chart above, red line). In addition, November represented the second time in the last three months that the RPI stood above 100, which signifies expansion in the index of key industry indicators.

“The November increase in the Restaurant Performance Index was fueled by broad-based gains in both the current situation and forward-looking indicators,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Restaurant operators reported their strongest net positive same-store sales results in more than four years, while customer traffic levels also grew in November.”

“Among the forward-looking indicators, restaurant operators’ outlook for both sales growth and the overall economy rose to their highest levels in seven months,” Riehle added.

Restaurant operators reported positive same-store sales for the sixth consecutive month in November. Fifty percent of restaurant operators reported a same-store sales gain between November 2010 and November 2011, while just 28 percent reported a same-store sales decline. This marked the strongest net positive sales performance since August 2007, when 54 percent of operators reported a sales gain and 29 percent reported lower sales.

The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions),stood at 100.9 in November – up 0.4 percent from October and the third consecutive monthly gain (see blue line in chart). November also marked the third consecutive month that the Expectations Index stood above 100, which represents a positive outlook among restaurant operators for business conditions in the months ahead."

MP: The improvements in the November restaurant indexes are consistent with the strong improvements in the Conference Board's Consumer Confidence Index in both November and December, and would suggest that the restaurant activity will continue to improve in December and into next year. This is one more indicator that the U.S. economy and recovery are gaining momentum in the final months of 2011.

Thursday, December 29, 2011

October Natural Gas Production Sets New Record

October was another record-setting month for the world's largest natural gas producer, as the U.S. produced all-time record amounts of both gross withdrawals and dry production (consumer-grade gas), according to new data released today by the Energy Information Administration (see chart above). The record-setting gross volume in October (2.48 trillion cubic feet) was above its year-earlier level by 6.4%; and the all-time high for monthly dry gas production was 7.6% above last October, and surpassed two trillion cubic feet for the first month ever.

Over the last five years as unconventional shale gas has become increasingly more available due to advanced extraction techniques (fracking and horizontal drilling), gross withdrawals of natural gas have increased by one-third and dry gas has increased by more than 42%. Welcome to America's new age of energy abundance with enough natural gas to last well into the 22nd century.

Intrade Odds for 2-Term Obama Now Above 52%

As the chances for the Republicans to produce a strong, unifying presidential candidate look less and less likely, and as the economy gradually improves, Obama's chances for re-election keep getting better and better, according to Intrade odds (see graph above). In October and early November, Obama's re-election odds were less than 50-50, but are now slightly above 52%.

Economic Reports: Signs of Ongoing Recovery

1. Rail traffic for the week ending December 24 showed strong gains, with carloads up by 11.9% and intermodal volume up by 22.9% compared to the same week last year. On a year-to-date (YTD) basis for 51 weeks in 2011, carloads are above last year's count by 2.2% and intermodal volume is 5.5% ahead of the 2010 level. Some of the leading weekly and YTD gains in carload volume have been for lumber (30.1% weekly and 8.8% YTD), motor vehicles (23.2% and 9.7%) and petroleum products (36.4% and 11%), which reflects the underlying growth in the construction, manufacturing and energy sectors.

2. The American Staffing Association's Staffing Index of temporary hiring activity reached a year-to-date high of 93 for the week ending December 18, which was the highest weekly index level since last year at this time. In contrast, the ASA Staffing Index was only at 80 and 81 in the comparable weeks in the previous years of 2008 and 2009.

3. The National Association of Realtor's November Pending Home Sales Index reached its highest level in 19 months going back to July 2009 when the index was artificially boosted when buyers rushed to beat the deadline to qualify for the federal government's home buyer tax credit.

4. The Labor Department reported today that the four-week moving average for initial claims fell to a three and-a-half year low of 375,000 for the week ending December 24, and the four-week moving average for continuing claims fell to 3,598,750, the lowest since September 2008, more than three years ago.

5. The 30-year fixed mortgage rate average rose by 4 basis points to 3.95% this week, still incredibly low by historical standards, and probably a factor in the rise in pending home sales.

6. Florida home sales in November showed signs of an improving real estate market in the Sunshine State, with increased sales of 11.4% compared to last year, and median prices stabilizing at the same level as a year ago at around $130,000.

Wednesday, December 28, 2011

Energy Charts of the Year (Updated)

There have been a number of year-end "Charts of the Year" lists recently, see Ezra Klein's Wonkblog, The Atlantic, the BBC, NPR's Planet Money, and AEI's Jimmy Pethokoukis. But every one of these lists of charts missed what might be the biggest economic story of 2011: The new age of energy abundance in the United States, thanks to recent breakthroughs in advanced drilling technologies (fracking and horizontal drilling) that have unlocked vast supplies of previously inaccessible "unconventional" natural gas and "tight" oil from shale formations around the U.S.

Below are my six (updated) "Energy Charts of the Year" that help tell the story of the "shale revolution" that is transforming America's energy outlook, with major, positive implications for U.S. energy security, economic growth and job creation, a manufacturing revival, and even government revenues.

1. U.S. net oil imports in 2011 (through November) were only 45.4% of domestic consumption, which is down from the peak of 60% in 2005 and at the lowest level since 1995, thanks to greater energy efficiency and reduced demand, but also in large part due to increased domestic oil production (see chart below).

2. The epicenter of the domestic shale revolution is the oil-rich Bakken region in western North Dakota, which has turned North Dakota into America's "Economic Miracle State." The ongoing record-setting oil production in the Peace Garden State (see chart below) continues to make it the most economically successful state in the country, with record levels of employment and income growth, increasing tax revenues, the lowest home foreclosure rate in the country, a strong real estate market with consistently rising prices, and jaw-dropping jobless rates in many counties of the Bakken region below 2%. At the current pace of record-setting monthly gains in oil production, North Dakota will likely surpass both California and Alaska sometime in early 2012 to become the No. 2 oil-producing state in the U.S.

3. North Dakota currently boasts ten counties with jobless rates below 2% in October, but at the epicenter of the Bakken region in Williams County, home of the city of Williston, the jobless rate in October was an unbelievable eye-popping 0.9%, see chart below.

4. Moving east to the gas-rich Marcellus shale formation covering Pennsylvania, Ohio and West Virginia, the chart below shows the dramatic increases in domestic natural gas production over the last five years. After about a decade of stable gas production, the advanced fracking technologies starting becoming available about five years ago and boosted domestic gas production by almost 25% since 2006 (see chart below). The boom in unconventional shale gas made America the world's No. 1 producer of natural gas, when it passed Russia in 2009.

5. Thanks to the new abundant supply of unconventional shale gas in the U.S., we've now got access to a 100-year supply of the energy resource at the current consumption rate, and prices have dropped significantly. The chart below displays the monthly inflation-adjusted price of natural gas back to 1997, and shows that the current spot price of gas is close to a ten-year low, and is 70-80% below the peaks in 2001, 2006 and 2009. Additionally, gas prices over the last two years have been more stable than any two-year period since the late 1990s; so gas prices are not only close to historic lows adjusted for inflation, but are more stable than in more than a decade. It's the fact that gas prices are now both low and stable that makes it such an attractive source of energy for American manufacturers.

PricewaterhouseCoopers predicts that lower gas prices will help add one million new U.S. manufacturing jobs by 2025. And residential consumers around the country are saving hundreds of dollars this winter, as utility companies in many areas have started to lower rates for piped natural gas.

Update:

6. Here's another graph below (thanks to Junkyard Hawg for the suggestion) that shows the percentage difference in the historical spot prices of oil and natural gas, on an energy equivalent basis, with natural gas prices converted at the ratio of 5.8 million BTUs per barrel of oil. Over the last 18 years, natural gas has been cheaper than oil on an energy-equivalent basis most of the time except for fairly short periods in 1996 (1 month), 2001 (5 months), 2003-2004 (7 months), and 2005 (4 months). For the last 33 months starting in March 2009, natural gas has been more than 50% cheaper than oil, and in November gas was cheaper by a record 80% ($97.21 per barrel for oil vs. $18.79 for gas).

Bottom Line: Thanks to the shale gas revolution, there's never been a time in recent history when natural gas has been cheaper than oil on an energy-equivalent basis.

Job Creation Is the Price We Pay for Obamacare: From "Hire-and-Grow" to "Cut-and-Survive"

"Our company, CKE Restaurants Inc., employs about 21,000
people (our franchisees employ 49,000 more) in Carl’s Jr. and
Hardee’s restaurants. For months, we have been working with
Mercer Health & Benefits LLC, our health-care consultant, to
identify Obamacare’s potential financial impact on CKE. Mercer
estimated that when the law is fully implemented our health-care
costs will increase about $18 million a year. That would put our
total health-care costs at $29.8 million, a 150 percent increase
from the roughly $12 million we spent last year.

The money to cover our increased expenses will have to come
from somewhere. We are a profitable company and, after paying
our obligations, we reinvest our earnings in the business.
Reinvesting in the business is how we grow, create jobs and
opportunity. This is true for most U.S. businesses.

The complexity of this legislation makes it hard to
anticipate costs in the future. Our investments pay off -- when
they are successful -- over the long term. Because we don’t know
what our health-care expenses will be in two or three years, we
are unable to determine with any certainty how much our
investments will have to return for us to be profitable. All of
that counsels in favor of holding off on new investments and
saving our funds. We want to grow. But we are unable to do so
knowing that large and undetermined liabilities will absorb
funds we otherwise would invest for expansion.

Washington needs to understand that
legislation like the health-care law has costs as well as
benefits, that the costs suppress job growth, and that when too
much legislation kills too many jobs, everyone suffers. Chief executives have responsibilities to their existing
employees, customers and shareholders. We simply cannot risk
their jobs and their money by investing when we know that
legislation like Obamacare will make it so much harder to earn a
profit. The sooner both parties in Washington understand this,
the sooner we can all begin looking for ways to strengthen the
social safety net without hurting the economy."

Crony Capitalism Shuts India's Doors To Wal-Mart

India's Prime Minister Manmohan Singh and his Congress Party recently
capitulated to political pressure and reversed their earlier decision
to expand foreign direct investment in India's nearly $400 billion
retail sector, which would have bolstered a slowing domestic economy and
created millions of new jobs. Call it India's version of America's recent "Keystone XL pipeline
cop-out" — and an illustration that it's not just America's political
leaders who talk about creating jobs but then frequently defer to
favored special-interest groups and leave jobs on the table.

By delaying retail foreign direct investment, the Indian government has
protected the intermediary status quo, and ignored the plight of 500
million desperately poor Indians living on farms who have publicly
voiced their support of allowing retail giants to enter the Indian
market.

For decades, the intermediaries and middlemen of social and financial
status have formed a powerful political force that now perpetuates a
humanitarian tragedy by continuing to be protected from foreign
competition. By delaying the decision that would allow multibrand retailers like
Wal-Mart to enter India's booming retail sector, the Indian government
is passing on a valuable opportunity to energize the retail market,
create millions of new jobs and break the supply chain cartel that has
impoverished India's small farmers.

The Year in Four Charts

Markets in Everything: RedNek Wine Glass

MSNBC -- "America's love affair with the irreverent, tacky and politically
incorrect is making millions for at least one business. Carson Home
Accents, a 41-year-old, family-owned company based in Freeport,
Pa., struck gold recently when it started manufacturing and selling
RedNek Wine Glasses. The company, a wholesaler of gift and home
decor items, started making the wine glass -- simply a Ball Mason
jar glued on top of a Libbey candlestick holder -- 10 months ago,
and in less than a year, the product has had $5 million in sales."

1st Super-Computer (1956) v. Today's Flash Drives

Updates on the Shale Revolution

1. Wall Street Journal -- "Shale-gas production is spurring construction of plants that make
chemicals, plastics, fertilizer, steel and other products. A report
issued earlier this month by PricewaterhouseCoopers LLC estimated that
such investments could create a million U.S. manufacturing jobs over the
next 15 years.

Even foreign manufacturers are joining in. Low U.S. electricity and
natural gas costs were a factor in the decision by Brazil's Santana
Textiles to build a $180 million denim plant now under construction in
Edinburg, Texas. Santana initially considered putting the factory in
Mexico but found that electricity costs would be 30% lower in Texas."

2.Oil jobs the new gold as thousands join N.D. rush -- "Williston, with a population of around 20,000, was a quiet North
Dakota town, surrounded by oil fields that had been in decline for
decades. Now, it is the heart of the Bakken, a new oil play that has
abruptly woken one of the sleepiest states in the Union, transforming
North Dakota into an energy heavyweight. It has also made Williston, whose surrounding county now has the lowest
unemployment rate in the entire country, a new destination for America’s
jobless, homeless and would-be rich."

3.Ohio sand turns to gold as drilling boom comes to Buckeye State -- "Rob Sidley is sitting on a gold mine, thanks to Mother Nature. His family-owned company produces the special sand needed for the drilling boom in Ohio’s deep layer of Utica shale. The sand is perfect for the hydraulic fracturing process — or
fracking — which uses force to open cracks in the shale and free up
natural gas, oil and other lucrative products.

Nationally, the market for American fracking sands quad­rupled from 2000 to 2009." (HT: Energy Tomorrow)

4. Associated Press — "The United States has record supplies of natural
gas and plenty of reasons to promote natural-gas powered cars, but so
far consumers, manufacturers and fuel suppliers haven't shown much interest.

Now,
a major natural gas developer's plans to vastly increase the number of
truck stops that offer liquid natural gas could help boost its use in
the vehicles that burn the most fuel, while promoting its availability
to a wider market. Lots of natural gas is available, if U.S.
drivers decide to use it. In just a few years, domestic natural gas
supplies have increased by trillions of cubic feet through shale finds,
boosting the supply to the point where plans are in place to export part
of the overflow."

Some Great Questions from Don Boudreaux

1. Why are the pundits and politicians who most fear the motives and the power of private corporations typically also the most strident advocates of higher tariffs to protect these corporations from competition?

2. Why do so many conservatives who profess dedication to individual liberty oppose the liberty of adults to smoke marijuana and to consume other narcotics?

3. Why do so many "progressives" believe that higher marginal tax rates on incomes will not dampen workers' efforts to earn income, but that higher marginal tax ("tariff") rates on imports will dampen importers' efforts to supply imports?

4. Why do so many "progressives" who preen publicly about their magnanimity toward the poor want to prevent foreign workers -- most of whom are far poorer than is any American -- from bettering their lots by competing freely against relatively rich American workers?

5. In the same vein, why do so many "progressives" -- nearly all of whom seem to regard differences in income earnings across workers to be an Olympian injustice -- support protectionist policies that artificially enhance the incomes earned by relatively rich American workers by artificially reducing the incomes earned by much-poorer foreign workers? Why is this greater income inequality of no concern to "progressives"?

6. Why are "progressives" madly obsessed with inequality of incomes but not with inequality of work effort, risk taking, prudence, courage, honesty, integrity, ambition and dedication? Monetary incomes, after all, are largely a result of the application of these qualities: Those who apply more of these qualities to their lives and careers generally earn higher incomes than are earned by those who apply fewer of these qualities to their lives and careers.

Monday, December 26, 2011

A New Energy Future is Emerging From Tight Oil and It Holds the Promise of Ending Oil Imports

"The Bakken is an oil play
that has erupted across a forgotten corner of the U.S. It is a frenzy of
drilling and pumping and moneymaking. It is also a place where a new
energy future is emerging, one that holds the promise of ending U.S.
dependence on overseas oil and kick-starting the country’s stagnant
economy. Government estimates suggest it could yield 4.3 billion barrels
of oil. One industry estimate is five times higher, which would mean
the Bakken alone could hold as much recoverable oil as the rest of the
country. And it’s just the beginning.

The flares lit in the
Bakken, a so-called “tight oil” play enabled by a revolution in drilling
technology, are spreading rapidly across the continent. Suddenly,
geologists and drillers are discovering that what works in the Bakken
works in a lot of other places, too, bringing forth sudden new volumes
of oil – and optimism that there will be much more – in Texas, in Utah,
in Ohio, in Saskatchewan and in Alberta. In all, 14 places are being
explored for tight oil.

All those drills turning in all those places have sweeping ramifications for North America.

The
Bakken and its followers have fundamentally altered the energy outlook
for the continent. If energy consultant IHS CERA is right, in the span
of merely one decade, tight oil wells will pump more oil than the entire
oil sands. The growth is so globally significant that the firm has
reduced its 2020 world oil price estimate down from $120 to $100 a
barrel. And it’s begun contemplating possibilities that would have been
considered insane only a few years ago.

Tight oil also stands to
have a substantial economic impact. The enormous cost of drilling tens
of thousands of wells – which can run $10 million each, not
including the cost of acquiring land – will pour hundreds of billions
into domestic wages and manufacturing. The fact that Americans will be
buying U.S. gas at the pumps will also have a meaningful impact on the
dollars the country sends abroad every year.

“There might be some possibility that we could ... pretty much reduce our oilimports
to zero,” said Leta Smith, director of oil and gas supply outlooks with
IHS CERA. “That’s a really optimistic case. And that’s not what we’re
forecasting right now. But still, it’s an interesting question to
postulate.”

The sun that shines on the Bakken, it seems, is shining on America itself."

Markets in Everything: Solar Paint

ScienceDaily — "Imagine if the next coat of paint you put on the outside of your home generates electricity from light -- electricity that can be used to power the appliances and equipment on the inside.

A team of researchers at the University of Notre Dame has made a major advance toward this vision by creating an inexpensive "solar paint" that uses semiconducting nanoparticles to produce energy."

Many NY Homeowners Switching to Nat Gas Heat

Times Herald Record (NY) -- "Many homeowners are switching to natural gas heat as oil prices go up: The Cost of conversion runs in the thousands, but folks say they recoup it quickly."

Conversion costs:

$1,500 to install a natural gas power burner in an existing oil-fired boiler.$5,000 to $8,000 for a new natural gas boiler; higher price, higher efficiency.$500 to convert from propane to natural gas, with minimal piping modifications.

The price of warmth: Projected household expenditures in the Northeast for winter heating fuels in 2011-12, and change from 2010-12:

Natural gas

$1,023

-2.2%

Oil

$2,492

+8.4%

Electricity

$1,333

-5.8%

Propane

$2,919

+6.7%

Source: U.S. Energy Information Administration

MP: Here's yet another example of the many positive benefits of the shale gas revolution: consumers are saving money by switching to clean, high-efficiency natural gas (and most are probably switching "naturally," without any special energy tax credits, rebates, etc.), and heating companies are getting business installing new natural gas furnaces, boilers and burners.

Gingrich Odds Fall from 38% to 8.2% in 2 Weeks

USA: Ranks #1 Most Charitable Nation in the World

Charities Aid Foundation (a UK international charity): "This is the second edition of the 'World Giving Index', the largest study into charitable behavior across the globe involving 153 countries in total. Using data from Gallup's Worldview World Poll, the report is based on three measures of giving behavior - giving money, volunteering time and helping a stranger.

The results show that the USA is officially the most charitable nation in the world, moving from fifth place last year to first place this year. Ireland is the second most charitable country and Australia the third (see chart above, click to enlarge). Overall the World Giving Index, demonstrates that the world has become a more charitable place over the last 12 months - with a 2% increase in the global population 'helping a stranger' and a 1% increase in people volunteering."

Sunday, December 25, 2011

Merry Christmas from Carpe Diem!

Thanks for your readership and support this year, and for setting a new benchmark for CD in November of more than 200,000 monthly visits (not seasonally adjusted!) for the first time ever (see chart above)!

Living the Good Life: The Good Old Days Are Now

Here's another comparison of consumer purchasing power in the 1960s versus today, based on the time cost of common household appliances like a kitchen oven. The Sears Kenmore oven pictured below retailed for $330 in 1966, which would represent 121.3 hours of work (about three weeks) at the average hourly wage in that year (ignoring taxes).

At the current average hourly wage of $19.54, today's average consumer would earn roughly $2,370 working 121.3 hours, and would be able to furnish their entire kitchen and laundry room with the eight new appliances pictured below (click to enlarge) from Best Buy including a high-efficiency front-loading washing machine, a super capacity gas dryer, a 30-inch gas stove, a 8.8 cubic feet chest freezer, a 16.5 cubic foot refrigerator, a 24-inch dishwasher, a mid-size microwave and a blender:

In other words, with the income earned working 121 hours, the typical consumer 45 years ago in 1965 would have only been able to purchase a single appliance - the electric oven pictured above, compared to the eight appliances that a typical consumer could purchase today with the income earned working 121 hours.

Measured by what is ultimately most important, the value of our time, household appliances keep getting cheaper and cheaper, thanks to innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year. As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.

Saturday, December 24, 2011

Markets In Everything: Cheap Seats on Charters

The Tennessean -- "If you’ve ever wondered what it’s like to fly on those fancy private aircraft that rich people use for getaways such as skiing or beach weekends, a new Web-based company in Smyrna, Tennessee aims to put you in the jet set — at prices that rival those of regular airline seats. SocialFlights.com allows individuals to book vacant seats on private charter airplanes via the Web and ride point-to-point, avoiding layovers, plane changes and even those long security lines.

Nationwide, more than 91 private air-charter firms, which operate 627 private aircraft with 30 seats or fewer, have already signed up to offer their empty seats to Social Flights users, said Jay Deragon, chief executive officer and a co-founder of Social Flights. More than 12,500 people have registered to use the service.

“We’re essentially using social networking to fill vacant seats on private aircraft that go all over the place every day, often with nobody on board,” he said. “A company or group might charter a jet to take them to California, but then that plane flies back empty. With Social Flights, people can buy individual seats on the return trip, giving the charter company revenue it wouldn’t have had.”

On these charter flights, passengers don’t have to go through metal detectors or X-ray machines. Their names are run through the TSA’s no-fly list, however, so any suspected terrorists would not be able to board the planes. Deragon says "You can just show up 15 minutes before your flight and walk right on."

Besides vacant seats on planes that are already scheduled for trips, Social Flights offers users the ability to bring enough people together for a particular date and destination to be able to charter an aircraft at per-person rates that often are much less than a first-class seat on an airline."

Design Your Own 787 Dreamliner

Friday, December 23, 2011

Merry Christmas from the Shale Gas Revolution

CPI for natural gas in November was at the lowest level for that month since 2003.

Here's a ChristmasChristmakwanzakuh present for consumers around the country:Natural gas prices for residential customers are falling this winter, thanks to the fracking revolution and America's new abundant supply of shale gas:

1. "Idaho's Intermountain Gas Company filed a request Thursday with the Idaho Public Utilities Commission to lower natural gas rates for its customers. The company says it is filing the interim purchased gas adjustment because the price of natural gas continues to decrease."

2. "Residential customers of Tennessee's Piedmont Natural Gas should get a break in their bills starting Feb. 1 as natural gas costs continue to fall. That is expected to be followed the next month by an increase in service charges, if it’s approved by the Tennessee Regulatory Authority. Still, payments over a year should be about 7 percent less after both changes. The typical residential customer who spent $739 for natural gas this year would pay $685 after the adjustments, according to Piedmont."

3. "If you're a Connecticut Light & Power customer you got a little something extra in your stocking this holiday season, as the state's largest electrical company announced Thursday that most residential customers will see a 7.5 percent rate decease on their bills starting in January."

"The lower rates are primarily due to falling natural gas prices, which affects how much we pay for power," said Jim Muntz, CL&P's acting president. "This is very positive news not only for our residential customers, but for all of our Standard Service customers, who will see reductions in their rates."

4. "New Jersey's PSE&G has announced that it is lowering residential gas bills by an additional 4.6 percent, or nearly $8.53 per winter month for the typical residential customer.
The utility said the action represents the eighth decrease in a row for residential customers, for a total of more than $614, or 35 percent, in savings since January 2009. The price reduction takes effect Dec. 1.

PSE&G attributed the cost savings and rate reductions to lower market prices for natural gas, which are partially due to the availability of abundant and lower cost shale gas."

MP:The chart above displays the CPI component: "Utility (piped) gas service, U.S. city average," and shows that this measure of natural gas prices for residential customers this November are at the lowest level for that month since 2003. In contrast, over that same period, the overall CPI and the CPI for foodhave increased by 22%, and the CPI for gasoline has increased 120%.

Richard Branson: Time to End The War on Drugs

After visiting Portugal, Richard Branson was impressed with the country's success with its decade-old effort to decriminalize drug use, and now says that it's time to end the worldwide War on DrugsWar on Peaceful People Who Voluntarily Choose To Use Intoxicants Not Currently Approved of By Various Governments, Who Will Put Users in Cages if Caught. In his own words, here's Richard Branson:

"Visited Portugal, as one of the Global Drug Commissioners, to congratulate them on the success of their drug policies over the last 10 years.

Ten years ago the Portuguese Government responded to widespread public concern over drugs by rejecting a “war on drugs” approach and instead decriminalized drug possession and use. It further rebuffed convention by placing the responsibility for decreasing drug demand as well as managing dependency under the Ministry of Health rather than the Ministry of Justice. With this, the official response towards drug-dependent persons shifted from viewing them as criminals to treating them as patients.

Now with a decade of experience Portugal provides a valuable case study of how decriminalization coupled with evidence-based strategies can reduce drug consumption, dependence, recidivism and HIV infection and create safer communities for all.

Compared to the European Union and the US, Portugal drug use numbers are impressive.

Following decriminalization, Portugal has the lowest rate of lifetime marijuana use in people over 15 in the EU: 10%. The most comparable figure in America is in people over 12: 39.8%, Proportionally, more Americans have used cocaine than Portuguese have used marijuana.

Portugal’s 10 year experiment shows clearly that enough is enough. It is time to end the war on drugs worldwide. We must stop criminalizing drug users. Health and treatment should be offered to drug users – not prison. Bad drugs policies affect literally hundreds of thousands of individuals and communities across the world. We need to provide medical help to those that have problematic use – not criminal retribution."

"This article analyzes the distribution of value from innovation in the global supply chains of the Apple iPad and iPhone. We find that Apple continues to capture the largest share of value from these innovations. While these products, including most of their components, are manufactured in China, the primary benefits go to the U.S. economy as Apple continues to keep most of its product design, software development, product management, marketing and other high-wage functions in the U.S. China’s role is much smaller than most casual observers would think. A key finding for policymakers is that there is little value in electronics assembly. Bringing high-volume electronics assembly back to the U.S. is not the path to “good jobs” or economic growth."

Here are some key points of the article:

"It is a common misconception that China, where the iPad is assembled, receives a large share of money paid for electronics goods. That is not true of any name-brand products from U.S. firms that we’ve studied. The breakdown of value in these two iconic Apple products shows why (see charts above).

First, our assignment of profits (which exclude wages paid) to first-tier suppliers is based on the location of their corporate headquarters. There are no known Chinese suppliers to the iPhone or iPad. The iPhone and iPad are assembled in mainland China factories owned by Foxconn, a Taiwan-based firm."

From the conclusion:

"This study also confirms our earlier finding that trade statistics can mislead as much as inform. Earlier we found that for every $299 iPod sold in the U.S., the U.S. trade deficit with China increased by about $150. For the iPhone and the iPad, the increase is about $229 and $275 respectively. Yet the value captured from these products through assembly in China is around $10. Statistical agencies are developing tools to gain a more accurate breakdown of the origins of traded goods by value added, which will be attributed based on the location of processing, not on the location of ownership. This will eventually provide a clearer picture of who our trading partners really are, but, while this lengthy process unfolds, countries will still be arguing based on misleading data.

Those who decry the decline of U.S. manufacturing too often point at the offshoring of assembly for electronics goods like the iPhone. Our analysis here and elsewhere makes clear that there is simply little value in electronics assembly. The gradual concentration of electronics manufacturing in Asia over the past 30 years cannot be reversed in the short- to medium-term without undermining the relatively free flow of goods, capital, and people that provides the basis for the global economy. And even if high-volume assembly expands in North America, this will likely take place in Mexico where there is already a relatively low-cost electronics assembly infrastructure."

MP: Based on the way trade statistics like U.S. imports from China are mis-calcuated and overstated in terms of actual value added, I estimated here that we might actually have a trade surplus with China using a value-added approach. It's an important distinction that Apple products (and other electronic goods) are really only "Assembled in China," and not actually "Made in China." The value of the final assembly in China is pretty small compared to the value added in the U.S., and yet China gets credit for the majority of the value according to the way trade statistics are calculated.

It's probably the case that trade statistics for merchandise exports and imports are pretty outdated and not able to capture the nuances of international supply chains and value-added measurements in a global economy. In previous eras, an import from China or Mexico or Canada was probably really made and assembled in those countries with their domestic content, parts and labor. Now iPods, iPads and iPhones are imported from China, but just a small fraction of the value of those products is actually created in China; yet China gets a majority of the credit for the export value of those products into the U.S. only because final assembly takes place there. With a more accurate accounting of trade flows based on value added, our trade deficit with China would shrink significantly, and might even disappear altogether.

Racial Preferences Have Backfired Due to the Cruelty of Affirmative Action's Academic Mismatch

"The inability of racial preferences to vault more minority students into high scholastic achievement shouldn’t come as a surprise. When an elite institution relaxes its usual standards to admit more blacks and Hispanics, it all but guarantees that those academically weaker students will have trouble keeping up with their better-prepared white and Asian classmates. Minorities who might have flourished in a science or engineering program at a middle-tier state college are apt to find themselves overwhelmed by the pace at which genetics or computer architecture is taught in the Ivy League. Many decide to switch to an easier major. Others drop out altogether.

This is the cruelty of affirmative-action “mismatch’’ — the steering of minorities to schools where they are less likely to succeed. Absent such preferences, black and Hispanic students would attend universities for which their credentials better suited them. Many would earn higher grades or degrees in more prestigious and challenging fields; more would go on to graduate school and careers in academia or the professions. If it weren’t for race-based admissions policies, in other words, underrepresented minorities wouldn’t be so underrepresented.

Racial preferences, says University of San Diego law professor Gail Heriot , have backfired. She is one of three members of the civil rights commission urging the Supreme Court to recognize the damage it unleashed when it allowed racial “diversity’’ to trump the Fourteenth Amendment’s guarantee of equal protection of the laws. Skin color was always an ill-contrived proxy for diversity of experiences and beliefs. What more than 30 years of race-based admissions have made clear, Heriot argues, is that “even with the best motives in the world, race-based admissions do far more harm than good.’’ Especially to the students they are supposed to help."

Related: In this editorial, I also suggest that racial preferences for college admissions do a great disservice to minority students because of the problem of "academic mismatch."

Thursday, December 22, 2011

Candidate Match Game

The Miracle of the U.S. Manufacturing Sector

Following up on the "Magic and Miracle of the Marketplace" post below, the chart above shows that the decline in prices over time has taken place for almost all manufactured goods, not just for electronics. As a percent of consumer expenditures, the combined share of spending on food, cars, clothing and household furnishings (furniture, appliances, etc.) has fallen over time from close to 50% in the late 1940s to close to 16% in 2010. This decline in spending over time on manufactured goods, measured as a share of all consumer spending, is really a testament to the remarkable productivity of the manufacturing sector, which leads to declining prices relative to income and services, and increases our standard of living dramatically over time.

From Rags to Riches: Fighting India's Caste System with Capitalism: From the "Village to the Palace"

NEW YORK TIMES -- "As the founder of a successful offshore oil-rig engineering company, Mr. Ashok Khade is part of a tiny but growing class of millionaires from the Dalit population, the 200 million so-called untouchables who occupy the very lowest rung in Hinduism’s social hierarchy.

“I’ve gone from village to palace,” Mr. Khade exclaimed, using his favorite phrase to describe his remarkable journey from the son of an illiterate cobbler in the 1960s to a wealthy business partner of Arab sheiks.

The rapid growth that followed the opening of India’s economy in 1991 has widened the gulf between rich and poor, and some here have begun to blame liberalization for the rising tide of corruption. But the era of growth has also created something unthinkable a generation ago: a tiny but growing group of wealthy Dalit business people.

Some measure their fortunes in hundreds of thousands of dollars, and a handful, like Mr. Khade, have started companies worth tens of millions. With their new wealth they have also won a measure of social acceptance.

“This is a golden period for Dalits,” said Chandra Bhan Prasad, a Dalit activist and researcher who has championed capitalism among the untouchables. “Because of the new market economy, material markers are replacing social markers. Dalits can buy rank in the market economy. India is moving from a caste-based to a class-based society, where if you have all the goodies in life and your bank account is booming, you are acceptable.”

Milind Kamble, a Dalit contractor based in the city of Pune in Maharashtra State, said that out of the 100 or so members of the Dalit Indian Chamber of Commerce and Industry in his city, only one was in business before 1991.